The Charlie Munger Portfolio
A portfolio based off of the wisdom of the late great Charlie Munger
Charlie Munger often times when lecturing about the good investment talked about the few following things
Return on Invested Capital
He was often quoted saying that if you own a business for 40 years earning 18% on capital, even if you paid a mediocre price you will end up with a good result.
Concentrating into the best ideas
Charlie Munger said that the whole entire secret of investing was to find places where it is safe and smart to not diversify. That is completely correct.
Less focus on valuation more focus on quality
While Munger was a value investor, he thought that it would be better to pay 25 times earnings for Costco, than most other investments one could make. Quality to him really meant you do not need a great price.
Extreme patience
Munger always believed that the gains to be made investing were not from the buying or the selling, but from the waiting.
Avoiding negatives
Charlie would often ask himself not just what to look for in a company, but also would think a lot about what you don’t want to see
So now that you have some additional background information about Charlie’s approach, I am going to construct a portfolio that Charlie could have respected. I am going to also put this portfolio into a paper portfolio so that I can track the results. I also tried to be at least a little creative, instead of just putting down names like Amazon, Costco, or American Express I tried to apply Charlie’s ideas to slightly less obvious places. Ultimately, you are responsible for your decisions and results, I do not know your situation, needs, or tolerances so this is not financial advice.
Stock 1: Airbnb
When thinking in super long time spans, I ask myself a couple questions. Do I feel certain that people will still be using this product or service in 40 years, and do I feel good about the company’s ability to be doing well in 40 years from now? I answer yes to both of those questions for Airbnb. I do believe that Airbnb’s alternative vacationing and way to stay is here to stay. You can often get nice Airbnb’s for 3-5 times the space of the same price in a local nice hotel making it a really good option for large families and groups. They also offer far more interesting and dare I say fun places to stay than your average hotel, which some consumers like to experience when away from home. In addition, they offer people traveling with animals additional options when there are no hotels in their price point that work, and additional cheap stays for price conscious travelers. Not to mention, their website is incredibly simple and helpful to use when figuring out where to stay. I do not think in 40 years, that all travelers will be staying in “alternative” accommodations versus hotels, but I think the two will coexist with some gains over time in favor of alternative. Airbnb has some of the strongest network effects of any technology company. These network effects are what will keep them the top dawg for a long time. It is also helpful that they have a very well-known brand, and when people of think getting an Airbnb to stay, they actually think of Airbnb as a verb in a way similar to Google; Vrbo’s brand is not even close. When you the traveler are looking for a place to stay, you are going to often go towards the website that has the most options conveniently presented, why else would you go on any other site than the one with the most well presented options. When you the host are deciding to rent out your property, you are going to take the time to at least rent it out from the most popular website, so that your property is being rented out all year long. This continuous cycle means people keep using Airbnb more than anyone else. Even with the growth in AI search, (which Airbnb has integrated into it’s platform) if you are looking at places to stay using ChatGPT, in order for hosts to sell, they have to have a “place” on the internet to rent it out, it ultimately still goes back to Airbnb’s platform. Also, Airbnb’s whole website is specialized at finding places to stay and can utilize their large number of resources to always keep their search tools the highest quality. Now that we have an attempt at Charlie Munger level understanding of the business, and have established it’s a high-quality moat, let’s talk numbers. Airbnb has debt to FCF of only .5 and debt to equity of .27 as of writing. They have double digit ROIC, ROE of above 30%, and gross margins above 80%. Their FCF consistently outpaces earnings as they have super super super super low need for capex, and instead can spend much of sales on advertising, R and D, and share repurchases. They actually earned 800 million in investment income last year because they are sitting on plenty of cash. Of their roughly 21 billion in assets, 92% are in cash/short term investments, tax deferred assets, and receivables. They only need 8% of their assets to for their entirety of their PPE, goodwill, and other assets. They are selling for a forward EV/EBIT and EV/FCF of 24.6 and 13.9 currently. The current CEO, chairman, and chief strategy officer currently own 25% of the stock because they cofounded Airbnb together. They are really a group of owner operators with long term incentive. I think Charlie can respect this thesis, quality is emphasized over price, it should have high ROIC for a long time, and it is a business that is protected sufficiently so that one could feel comfortable concentrating and waiting a long time.
Stock 2: Royal Bank of Canada
We are covering all of North America in this one with a U.S, Canadian, and Mexican stock. Canadian banks are a very good business to be in. If you gave me ten million dollars, and said that I only get to keep it if my 3 stocks with dividends reinvested are more valuable in 40 years from now, Royal bank of Canada would be one of them. In Canada 6 banks control 90% of the industry as opposed to thousands in the U.S. It is highly regulated and there are strong barriers to entry protecting existing banks from excess competition. This private public cooperation has made Canada’s banks far more stable than the U.S. They often times do not experience the busts that happen in American banking. The limited competition and low defaults also leave RBC and the other Canadian banks with high return on equity. RBC has not had ROE less than 13% any year the past decade. As Canada’s money supply, and credit generally expand over time RBC with its strong well-known brand, expansive products and services, and regulatory protection should keep it a top dawg. It uses its earnings to reinvest both in its business in Canada, grow a dividend, and expand its businesses abroad.
Stock 3: OMA Airports
I have talked about OMA airports before but I felt it made too much sense to put into this list so I did. OMA operates airports in Mexico and being an airport operator is a good business to be in. Unlike in America, abroad airports can be operated by private entities through a private-public partnership. OMA pays Mexico in exchange for the exclusive rights to operate airports in certain areas. As a result, OMA gets a natural monopoly as there are no other major airports within 40, 50, 60, 70, or sometimes 80 miles of theirs. Over time both domestic and international travel has grown in Mexico and will probably do so in the future. OMA over time has successfully added additional lines of business by making money from the shops inside the airports, advertising space inside the airport, and the parking garages traveler’s use. They earn high teen returns on capital, operate with debt to equity, EBITDA, and FCF all below 2, and are selling for an EV/EBIT and EV/FCF of 11.3 and 15.1
These 3 companies have strong moats protecting their position in a profitable industry for a long time, earn good returns on capital with conservative balance sheets, and the portfolio focuses its returns on a few great companies versus ten less understood less predictable ones. I hope the late Charlie Munger would approve.
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